American natural gas companies are struggling with oversupply

The past year has been rough for the oil industry. That’s especially the case for American natural gas (shale) providers. While the S&P 500 is flat on the year to date, natural gas companies are faced with big losses in light of low oil prices.

The United States Natural Gas Fund ETF, which provides a snapshot of the industry, is down 26 percent in 2016. Individual companies are faring no better. Range Resources Corporation, a gas exploration company, is down 38 percent in the past year. Oklahoma-based Chesapeake Energy Corporation has dropped a painful 68 percent in that time. This decline in oil prices is great for drivers, but it’s horrible for investors.

Adding to the problem of low prices is the fact that the US Energy Department announced that it has increased its stockpile of natural oil, signaling an early end to the winter. With warm weather coming in throughout the country, the natural gas industry could be dealing with a difficult Spring as demand drops this time of year.

Overproduction has been one of the leading causes of the decline in prices. The Wall Street Journal reported that natural gas production was at its highest level ever during the winter. Although oil companies have cut back some drilling, they’re going full steam ahead with many of their wells.

The hope is that prices will begin to increase during the summer, when energy use increases due to air conditioning. The world consumes about 92 million barrels of oil per day, which is a number that is expected to rise as get warmer.

“Going into Summer, producers know it’s going to be a massacre,” Sami Yahya, an analyst at Platts Bentek, told the WSJ.

International Pressure

It’s not just overproduction from American natural gas companies that are driving down prices. The Organization of Petroleum Exporting Countries (OPEC) welcomed the drop in prices as a way to run natural gas competitors out of business. Oil is cheap and plentiful in OPEC countries, so they’re able to weather the price drops better than other nations.

After months of declining prices, OPEC is now working to bring the market back. Last month, Saudi Arabia, Russia, Venezuela and Qatar agreed to freeze production to January levels. The agreement sounds good on paper, but won’t have much of an impact. According to the International Energy Agency, only Saudi Arabia had the ability to actually increase its production.

"So a freeze on production is perhaps rather meaningless. It's more some kind of gesture which perhaps is aimed [...] to build confidence that there will be stability in oil prices," said Neil Atkinson, head of the IEA’s Oil industry division, according to the International Business Times.

Positive Signs?

The oil industry, including American natural gas companies, has had some good news in recent days. The US Department of Energy stockpiled less natural gas than expected, which means the glut of supply could start dwindling soon. For perspective, the stockpiles are still 50 percent more than the average in previous year.

It’s possible that oil companies could find themselves in the same situation they’re currently in as soon as prices increase. The New York Times reports that oil producers are waiting for prices to rise again so they put the finishing touches on yet-to-be-completed oil wells. Doing this too quickly would increase prices once again. In the US alone, 1,200 oil rigs have been placed on hold for the last two years. Companies are waiting for the exact moment that starting them up again will turn a profit.

Even with the signs of improvement, the oil industry remains a risky bet for investors. Trying to guess where the floor is can be a risky proposition, as these low prices and glut in supply are unlike anything seen this generation. There’s no doubt that the industry will recover, but it’s impossible to say when.